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A Smarter Monkey

In this contributed piece, TIM noted that some traders do better than others when using data that has been run through certain analysis - that is, have used some form of machine learning to assist them.

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September 12, 2006

Fifth Third's E-Solution

By Nina Mehta

For Dan Whitney, head of trading at Fifth Third Asset Management (FTAM), today trading is mostly a "liquidity hunt." Algorithms are the primary reason why, Whitney says.

"They are putting everything into algorithms. They're content being average rather than putting up a print," Whitney says. He adds this is because they're often evaluated against the day's volume-weighted average price.

"Even if they could get best execution by putting up size and liquidity, traders could miss the VWAP, so they do 25,000 shares at a clip and space it out over the day," Whitney says. That increases order fragmentation. It is also why crossing systems and dark liquidity pools are getting more play from institutions, he says.

Fifth Third Asset Management became a wholly owned subsidiary of Fifth Third Bancorp in 2001 when the bank reorganized its investment advisory business and created a separate unit. This was done in part to bring outside money into its mutual fund complex.

The FTAM desk uses algorithms mainly as a tool to get started on an order until it finds natural liquidity. At that point, the trader will often cancel out of the algorithm and work the order directly. FTAM's traders use about a half-dozen Lehman algorithms and a few from Bank of America. The desk also plans to add Credit Suisse's algorithms. Currently the desk executes about 10 percent of order flow through algorithms, crossing networks and direct market access, up from about 5 percent a year ago. A year from now that figure could double again, he says.

While electronic trading is rising, one concern Whitney has is that algorithms can be reactive. "You have to be aware that if a big print goes up and it's in a smaller-cap name, the broker algo you're using may have a tendency to chase that," Whitney says.

An algorithm that has made inroads on FTAM's desk is Lehman's "work and pounce" algorithm. Whitney likes it because, instead of slicing an order into the market, the algorithm can be aggressively programmed based on trader-set constraints. "I don't want to miss liquidity when I'm balancing a number of trades on the desk," Whitney says. "The algorithm basically takes a lot of the manual labor out of the process and gets liquidity quickly that could have been missed." For direct market access, FTAM uses RealTick, a multi-broker platform owned by Townsend Analytics, an independent subsidiary of Lehman, and Direct Trading Institutional, a platform owned by Knight Capital Group. The desk also uses Pipeline for block crosses. Whitney says the desk has seen its executed volume on Pipeline rise over the last year, including trades in small-cap and micro-cap names.

With electronic trading increasing, Whitney says FTAM will soon eliminate its two-OMS system, using just one. The desk has different OMSs for custody and non-custody accounts.

Fifth Third Asset Management Equity AUM: $8.7 billion Desk: 3 Traders Electronic Trading: 10 percent Broker List: 40 Firms Avg. Comm.: 4.6 cents OMS: BNY's TeamTrader & Advent's Moxy Trade-Cost Analysis: Abel/Noser Corp.